Managerial Finance: Investment Appraisal, Project Evaluation Report

This report provides a comprehensive analysis of investment appraisal techniques within the context of managerial finance. It begins by calculating the cash flow, Net Present Value (NPV), Internal Rate of Return (IRR), and payback period for a proposed plant investment, interpreting the results to assess the project's financial viability. The analysis includes detailed calculations and interpretations of each metric, demonstrating the project's potential to increase firm value. Furthermore, the report evaluates two distinct projects, calculating their payback periods, NPV, and IRR to inform decision-making. The projects are then assessed based on defined criteria, leading to a ranking and a final investment decision, supported by relevant references.

Running head: MANAGERIAL FINANCE
Managerial Finance
Name of the Student:
Name of the University:
Authors Note:

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Table of Contents
Question 1:.................................................................................................................................2
a) Calculating cash flow of the plant:........................................................................................2
b) Calculating NPV and depicting the result of the investment option:....................................3
c) Calculating the internal rate of return and profitability index of the project, while
interpreting the results:...............................................................................................................3
d) Calculating the payback period for the proposed investment, while interpreting the results:
....................................................................................................................................................4
Question 2:.................................................................................................................................5
a) Calculating the payback period, NPV and IRR for both the projects:...................................5
b) Evaluating the projects on the basis of defined three decisions:...........................................6
c) Ranking the projects and making relevant decisions:............................................................6
Reference and Bibliography:......................................................................................................7

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Question 1:
a) Calculating cash flow of the plant:
Yea
r
Investment After tax cash Depreciation Cashflow
0 $
(3,000,000.00)
$ (3,000,000.00)
1 $ 700,000.00 $ 280,000.00 $ 980,000.00
2 $ 700,000.00 $ 280,000.00 $ 980,000.00
3 $ 700,000.00 $ 280,000.00 $ 980,000.00
4 $ 700,000.00 $ 280,000.00 $ 980,000.00
5 $
(2,000,000.00)
$ 700,000.00 $ 280,000.00 $ (1,020,000.00)
6 $ 700,000.00 $ 280,000.00 $ 980,000.00
7 $ 700,000.00 $ 280,000.00 $ 980,000.00
8 $ 700,000.00 $ 280,000.00 $ 980,000.00
9 $ 700,000.00 $ 280,000.00 $ 980,000.00
10 $ 700,000.00 $ 280,000.00 $ 980,000.00

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0 1 2 3 4 5 6 7 8 9 10
$(3,500,000.00)
$(3,000,000.00)
$(2,500,000.00)
$(2,000,000.00)
$(1,500,000.00)
$(1,000,000.00)
$(500,000.00)
$-
$500,000.00
$1,000,000.00
$1,500,000.00
Cashflow
b) Calculating NPV and depicting the result of the investment option:
Year Cashflow Dis-Factor Dis-Cash Flow
0 $ (3,000,000.00) 1.00 (3,000,000.00)
1 $ 980,000.00 0.91 890,909.09
2 $ 980,000.00 0.83 809,917.36
3 $ 980,000.00 0.75 736,288.50
4 $ 980,000.00 0.68 669,353.19
5 $ (1,020,000.00) 0.62 (633,339.75)
6 $ 980,000.00 0.56 553,184.45
7 $ 980,000.00 0.51 502,894.96
8 $ 980,000.00 0.47 457,177.23
9 $ 980,000.00 0.42 415,615.67
10 $ 980,000.00 0.39 377,832.42
NPV (Net Present Value) 1,779,833.12

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The positive NPV relevancy indicates the future value that will be added to the
company if the overall project is accepted. The net present value relatively indicates the
increment in firm value by 1,779,833.12 if RWE Enterprise accepts the project.
c) Calculating the internal rate of return and profitability index of the project, while
interpreting the results:
Year Investment After tax cash Depreciation Cashflow
0 $ (3,000,000.00) $ (3,000,000.00)
1 $ 700,000.00 $ 280,000.00 $ 980,000.00
2 $ 700,000.00 $ 280,000.00 $ 980,000.00
3 $ 700,000.00 $ 280,000.00 $ 980,000.00
4 $ 700,000.00 $ 280,000.00 $ 980,000.00
5 $ (2,000,000.00) $ 700,000.00 $ 280,000.00 $ (1,020,000.00)
6 $ 700,000.00 $ 280,000.00 $ 980,000.00
7 $ 700,000.00 $ 280,000.00 $ 980,000.00
8 $ 700,000.00 $ 280,000.00 $ 980,000.00
9 $ 700,000.00 $ 280,000.00 $ 980,000.00
10 $ 700,000.00 $ 280,000.00 $ 980,000.00
IRR 23%
Profitability Index 1.6
The internal rate of return of the proposed project is at the levels of 23%, while the
profitability index is at the levels of 1.6. Both the measures relatively indicate the positive
attribute of the proposed project, which could eventually allow the organisation to improve its
profitability in future. The internal rate of return is a relatively higher than the discounting

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rate which indicates the high profit that could be generated from the overall project.
Moreover, the profitability index is greater than 1, which relatively States the financial
viability of the proposed project (Baum and Crosby 2014).
d) Calculating the payback period for the proposed investment, while interpreting the
results:
Year Cashflow Cum-Cash Flow
0 $ (3,000,000.00) $ (3,000,000.00)
1 $ 980,000.00 $ (2,020,000.00)
2 $ 980,000.00 $ (1,040,000.00)
3 $ 980,000.00 $ (60,000.00)
4 $ 980,000.00 $ 920,000.00
5 $ (1,020,000.00) $ (100,000.00)
6 $ 980,000.00 $ 880,000.00
7 $ 980,000.00 $ 1,860,000.00
8 $ 980,000.00 $ 2,840,000.00
9 $ 980,000.00 $ 3,820,000.00
10 $ 980,000.00 $ 4,800,000.00
Payback period 5.1 years
The payback period is relatively at the levels of 5.1 years which indicates that the
project will collect all the relevant cash within the 5.1 years of operating. The payback period
is relatively lower than the life of the project which is a positive attribute for the organisation.
Hence, RWE Enterprise needs to approve the project for improving their profits over the
period of 10 years.

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Question 2:
a) Calculating the payback period, NPV and IRR for both the projects:
Particulars Project A Project B
Initial Outlay (275,000) (275,000)
Year 1 50,000 100,000
Year 2 75,000 100,000
Year 3 100,000 100,000
Year 4 125,000 100,000
Year 5 175,000 100,000
Discount rate 12% 12%
NPV 79,349.88 85,477.62
IRR 21% 24%
Payback period 3.4 years 2.8 years
b) Evaluating the projects on the basis of defined three decisions:
Particulars Project A Project B Standard Acceptance
NPV 79,349.88 85,477.62 Positive Accepted A and B
IRR 21% 24% 12% Accepted A and B
Payback
period
3.4 years 2.8 years <=3 years Accepted B
From the valuation of the above table it could be identified that only project be will be
accepted by the organization has it fulfills all the relevant standard propose for the selection
of the project. The company has a positive NPV, while its IRR is greater than the discounting